Content area
Full Text
The random walk theory asserts that stock price movements are unpredictable and follow a random erratic behavior. Similarly, the weak-form efficiency of the efficient market hypothesis states that everything is random; and past historical data on stock prices are of no use in predicting future prices. Thus, the aim of this study is to examine the random walk theory and testing the weak-form efficiency of Istanbul Stock Exchange. The study uses daily observations of XU 030 Index from January 1997 until December 2011, and employs unit root tests, runs tests and variance ratio test to investigate the random behavior of Istanbul Stock Market. The tests empirical findings reject the null hypothesis suggesting that Istanbul Stock Exchange does not follow a random walk behavior and, therefore, it is informationally inefficient at the weak-form level. These results suggest that investors will realize abnormal returns by using historical sequences of stock prices, data related to trading volumes and other market-generated information.
(ProQuest: ... denotes formulae omitted.)
Introduction
The random walk theory and the efficient market hypothesis have received a great deal of attention in finance literatures. The random walk theory asserts that stock prices movements are unpredictable and follow a random erratic behavior. Therefore, past stock prices movements are of no use to predict future prices movements. On the other hand, a capital market is considered to be efficient if it reacts immediately and accurately to all available information. Fama (1970) divided the efficient market hypothesis (EMH) into three forms: the weak-form, the semi-strong form and the strong form. The weak-form of the EMH assumes that current stock price reflect all security market information, including historical sequence of prices, rates of return, trading volumes, and other market generated information. Therefore, we should gain little from using any trading rules that decide whether to buy or sell security based on past rates of return or any other past market data. The semi-strong form of the EMH asserts that security prices adjust rapidly to the release of all public information. Therefore, investors who base their decisions on any important new information after it becomes public should not derive above-average risk-adjusted profits from their transactions. The most extreme form of the EMH is the strong form, where it states...